Erie Company manufactures a mobile fitness device called the Jogging Mate. The c

Question

Erie Company manufactures a mobile fitness device called the Jogging Mate. The company uses standards to control its costs. The labor standards that have been set for one Jogging Mate are as follows:

Standard Hours = 27 minutes

Standard Rate per Hour=$6.40

Standard Cost =$2.88

During August, 9,395 hours of direct labor time were needed to make 19,500 units of the Jogging Mate. The direct labor cost totaled $59,189 for the month.

Required:

1. What is the standard labor-hours allowed (SH) to makes 19,500 Jogging Mates?

2. What is the standard labor cost allowed (SH × SR) to make 19,500 Jogging Mates?

3. What is the labor spending variance?

4. What is the labor rate variance and the labor efficiency variance?

5. The budgeted variable manufacturing overhead rate is $4.50 per direct labor-hour. During August, the company incurred $48,854 in variable manufacturing overhead cost. Compute the variable overhead rate and efficiency variances for the month.

Explanation / Answer

1. Standard hours required for 1 unit - 27 minute

Therefore standard hours required for 19500 unit is -

19500*27 =526500 minutes i.e. 526500/60 = 8775 hours

2. Standard labour cost per hour is $6.40

For making 19500 units standard hour needed is 8775 hours ( calculated in point 1)

Therefore total standard cost allowed is $6.40*8775hours =

$56160.

3.standard labour cost for 19500 units= $56160

Actual cost incurred $59189

Then

Labour variance is $56160-$59189= 3029Adverse

4 calculation of labour rate variance:

Standard rate $6.40

Actual rate = 59189/9395 = $6.30

Therefore labour rate variance 9395*(6.40-6.30)

=939(approx) favourable.

Calculation of labour efficiency variance:

= (9395-8775)*6.40

= 3968 Adverse

5. computation of variable overhead rate variance:

Standard rate : 4.50 per direct labour hour

Actual rate : 48854/9395 = 5.2 per labor hour

Therefore, variable overhead rate variance:

(4.50 -5.20)*9395 = 6576.5 Adverse

Computation of variable overhead efficiency variance:

(8775 - 9395)*4.50 =2790Adverse

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